Capital and revenue expenditure and receipts Cambridge IGCSE Accounting revision
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In plain words
Some spending buys something that will serve the business for years: a van, a machine, a building. Other spending is used up straight away: fuel, wages, repairs. Accounting treats the two completely differently, and mixing them up gives the wrong profit.
6 things to know
- Capital expenditure is money spent on buying, improving or extending non-current assets. It includes the costs of getting the asset ready for use: delivery, installation and legal fees. It goes in the statement of financial position.
- Revenue expenditure is the day-to-day running cost of the business: wages, rent, fuel, insurance, repairs and maintenance. It goes in the statement of profit or loss.
- A capital receipt is money from outside normal trading: capital from the owner, a loan, or the proceeds of selling a non-current asset. It is not income in the statement of profit or loss.
- A revenue receipt is income from normal trading: sales, rent received, commission received, discount received. It goes in the statement of profit or loss.
- Capital expenditure wrongly treated as revenue: expenses are too high, so profit is understated, and non-current assets are understated.
- Revenue expenditure wrongly treated as capital: expenses are too low, so profit is overstated, and non-current assets are overstated.
Worked example
A business buys a machine for $20 000. It also pays $600 for delivery, $900 for installation and $450 for the first year's maintenance. Calculate the capital expenditure and the revenue expenditure.
- Capital: the price and the costs of getting the machine ready. 20 000 + 600 + 900 = $21 500.
- Revenue: maintenance keeps the machine running, and is paid every year. $450.
Tips and tricks
- The test: does it buy or improve an asset, or get it ready for use? Capital. Does it only keep things running? Revenue.
- Repairs are revenue. An improvement, such as adding an extension to a building, is capital.
It lands in your notebook with its questions as flashcards.
Capital and revenue expenditure and receipts: 5 questions and answers
These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.
Which is capital expenditure?
It buys a non-current asset.
Which is revenue expenditure?
It is a running cost, paid every year.
Which is a capital receipt?
It does not come from trading.
A machine costs $8000, with delivery of $200 and installation of $300. What is the capital expenditure?
All three are costs of getting the asset ready for use.
The purchase of a computer was debited to the office expenses account. What is the effect on profit?
Expenses are too high, so profit is too low.
Quiz
5 questions
Tap an answer and you’ll see straight away whether it’s right, and why.
Worksheet
2 questions, 5 marks. Write your answers on paper, then check them.
Capital and revenue expenditure and receipts
Cambridge IGCSE Accounting 0452 · 5 marks · papermunch.org
Name ______________________________ Date ______________
Explain the difference between capital expenditure and revenue expenditure.[2]
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Capital expenditure is spending on buying or improving non-current assets. Revenue expenditure is spending on the day-to-day running of the business.
The cost of repainting a shop, $800, was debited to the premises account. State the effect on the profit for the year and on the non-current assets.[3]
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Profit is overstated by $800, because an expense was left out. Non-current assets are overstated by $800.
Answers: Capital and revenue expenditure and receipts
- 1. Capital expenditure is spending on buying or improving non-current assets. Revenue expenditure is spending on the day-to-day running of the business.
- 2. Profit is overstated by $800, because an expense was left out. Non-current assets are overstated by $800.